Thursday, July 1, 2010

Got Questions? Get Answers...GR Wants To Walk Away To Move Closer To His Parents

GOT QUESTIONS?

Hello Mr. Diji,

First off, I want to tell you how great your website is, as I started to ponder the idea of a strategic default I stumbled across your site and it has been a wealth of information. So thank you for all the hard work you put into it.

Now I would like to tell you my situation and ask for your advice. I purchased my home in Connecticut in April 2005 for $245k. I put $15k down and had an original mortgage of $230k. In mid 2006 the house had appreciated a bit so I took out a home equity loan of $25k to pay off some high interest credit cards (I thought I was being smart). About a year and a half ago I refinanced my mortgage and home equity loan into one new mortgage, that mortgage now stands at $247k. My wife and I just had our first child and would like to move closer to my parents (a few towns over in CT) so we decided to call a realtor and see what the current value of the house is. To our dismay, she valued the house at about $200k. We desperately want to get out of the town we are in and closer to my parents for several reasons (baby sitting / free daycare, better school system). My current mortgage payment is $1900, and based on my estimate, if I continued to pay that every month, it would take over 10 years to see any equity and be able to sell. We can’t wait that long and we don’t have the savings to sell at a loss and make up the difference with the bank. We are going to attempt to rent the place but I don’t have high hopes for that. I don’t see another way out besides a strategic default. Since I have been making the payments and can afford them, I don’t see the bank qualifying me for a short sale or a deed in lieu of. The good thing is that the mortgage is only in my name, so we would be able to get a new mortgage in my wife’s name. And as far as I know, CT is a non-recourse state. Any advice you have would be greatly appreciated.

GET ANSWERS...

Dear GR:

I appreciate your words.

First things first. Let’s be sure if Connecticut is a non-recourse state. I strongly recommend that you speak to a qualified professional, such as an attorney. Deficiency rules are governed under §49-14 General Statutes of Connecticut. An appraisal process and hearing must be held on any application for a deficiency judgment. Please click this link so you can begin to familiarize yourself with the deficiency rules in Connecticut.

Let’s assume that Connecticut is a recourse state. You would then be exposed to a deficiency judgment. A deficiency judgment is an unsecured money judgment against a borrower whose mortgage foreclosure sale did not produce sufficient funds to pay the underlying promissory note or mortgage loan, in full.

Please read this link to learn more about deficiency judgments, debt obligations, and debt forgiveness.

There is a lot of truth when you say a bank is unwilling to work with anyone who pays their mortgage on time. Even if the property is upside down or the mortgage payments are “sucking” all of a person’s life savings. That said, you want to limit any exposure to a deficiency judgment.

A lender may allow a short sale even if you are current. I would contact your lender regarding a short sale. It is not likely a lender will agree to a deed-in-lieu unless you default on payments. You should ask the lender.

Beware of the Turn In Your Documents Trap. This happens when the lender’s representative asks you to turn in your financials via telephone or fax in order to see if you qualify for a loan workout, deed-in-lieu, or short sale. Before you do that ask the lender to send you something in writing stating that they will consider a work out option if you turn over your financials. Or ask the lender to direct you to their website regarding their processing rules. The problem I have is this: If, after you turn in your documents the lender does not agree to a workout, what happens to those documents? Can the lender use the information to during a foreclosure action or during a lawsuit seeking a deficiency judgment? I don’t think anyone wants to turn over their financial documents to be used against them.

While you are considering this you should probably move forward to get the new house. Even though your wife’s credit will not be impacted by your current property, you will both be emotionally impacted dealing with your current property situation. Once you have secured a new home, you can immediately implement your strategic default strategy. If you decided to rent instead of buy then your credit may be a factor. It’s best to take advantage of your good credit prior to any decision to strategically default.

Obviously, the key to renting your home is based upon how much the rental payment will cover the home’s expenses. Are you willing to cover the monthly short fall in order to preserve your credit? Is your credit score important to you? This is critical because experience has shown that most people who decided to strategically default are less concerned about their credit. If you understand that you must default to get a deed-in-lieu or short sale then it is something to seriously consider.

Remember that if you decide to give the property back to the bank make sure that it is in exchange for the complete and full satisfaction of all of the debt that is owed to the bank. This will eliminate any deficiency judgment risk. The key is to get any agreement with the bank in writing. If the bank is unwilling to accept the property for full satisfaction of the entire mortgage debt then demand that the bank forgives the balance. Normally, forgiven debt is taxable, however federal law exempts homeowners from any tax liability on forgiven debt under certain conditions including if it’s the homeowner’s primary residence. There are other factors which you can read about in my debt obligations, deficiency, forgiveness article.

It’s a careful balancing act. I can appreciate your reluctance to put money into a worthless asset that has very little chance of having any value. Who wants to be an economic slave to a home that simply enriches the bank and depletes savings.